The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Detailed instructor notes on three topics have been included for this chapter: • How do firms maintain growth during difficult economic times? Bank of America and Nation’s Bank are given as examples with notes regarding past performance and current strategies. These notes begin with the first slide on “External Environment.” • How firms anticipate and deal with new entrants to the market. Wal-Mart’s entrance into the retail grocery business is detailed. These notes begin with the slide titles “Industry Environment,” which is the initial discussion of the five forces of competition. • How firms respond to new competitors (lead, follow, or ignore). Examples of leading, following, and ignoring include: o Universal Studios and Disney o Amazon.com and Barnes and Nobles o Amazon.com and Borders Books o CNN and NBC o CNN and ABC o CNN and CBS These notes begin with the first slide titled “Competitor Analysis.”

Industry Environment Can firms anticipate new entrants to the market? (Grocery Retailing) Example 1: Wal-Mart Question How do we (Wal-Mart) leverage our strengths (fast turnover of goods, low-cost volume buying, etc.) to increase traffic and volume at our stores? In 2000 U.S. grocery sales grew by 3.4%, reaching $570 billion. Answer • Create and expand shelf space for groceries and dry good products. • Expand Supercenter Format to leverage additional shelf space: in 2001, grocery sales accounted for $17.1 billion in sales or 30% of total sales: o First Supercenter store opened in 1988; by 2000 Wal-Mart had 721 Supercenters o Supercenter openings consist of 60%-70% of new store openings within Wal-Mart o Wal-Mart projects 1,400 Supercenters by 2005 Fast Forward What share of the grocery market will Wal-Mart control in 2010?

Five Forces Model of Competition Can firms anticipate new entrants to the market? (Grocery Retailing) Example 2: Traditional Supermarkets Question Given the low margins and relatively low growth of this industry, should we (traditional supermarkets) expect new entrants into our domain? In 2000 U.S. grocery sales grew by 3.4%, reaching $570 billion. Answer No new entrants are likely. Thus prepare for continued industry consolidation. Specific Case Winn Dixie (now known as WD) is a good example. It has over 1,000 stores in 14 states, primarily in the Southeast, a stronghold for Wal-Mart. WD has responded to Wal-Mart’s challenge by remodeling its stores (over 60% in the franchise), closing unprofitable stores (112 stores in 2001) and other manufacturing / distribution centers, taking a $522 million restructuring charge. Strategic Reaction I Crank up M&amp;A activity to gain economies of scale and lower its cost structure: • In 2000 WD acquired the Gooding’s Markets chain in Orlando. • In 2001 WD acquired 68 stores of Mississippi-based Jitney Jungle. (Continued on next slide.)

Five Forces Model of Competition (cont.) Can firms anticipate new entrants to the market? (Grocery Retailing) Example 2: Traditional Supermarkets (cont.) Strategic Reaction II Expand private label items: WD brand items carry higher profit margins than comparable national brands. Fifty-one percent of buying public purchase private label brands “every time” or “fairly often” when they shop. WD can leverage this trend. For example, its WD Chek soda is a market leader in many of WD’s core markets. Fast Forward Will WD still be in existence as an independent company in 2010?

Competitor Analysis How should a firm respond to a new competitor, lead, follow, or ignore? Lead: Universal Studios’ Universal Park, a New Entrant Reaction by Established Firm: Disney Response I In response to Universal Studios building its Universal Park in Orlando, Florida, on Disney’s home turf, Disney aggressively built New Parks, new attractions to retain the buying public’s interest: • In 2000, Disney expanded the MGM Park by adding new rides (Tower of Doom, etc.) • In 2001, Disney completed its newest masterpiece, Disney’s Animal Kingdom, a cross between a traditional zoo and a traditional Disney theme park Response II Disney also expanded from its core Orlando turf by building attractions and/or strengthening attractions at its other theme parks: • In 2000 Disney opened its California Adventure • Disney also added attractions to both its Paris and Tokyo theme parks in order to maintain or expand its market position • Disney is planning on building a new park in Hong Kong in order to tap into the growing affluence of East Asia, especially the Chinese market (Continued on next slide.)

Competitor Analysis (cont.) How should a firm respond to a new competitor, lead, follow, or ignore? Follow: Amazon.com, a New Delivery Channel for Books Reaction by Established Firms: Barnes &amp; Nobles and Borders Books Barnes &amp; Nobles After the initial shock and denial, Barnes &amp; Nobles has spawned out its own online bookstore. It also used its brick-and-mortar presence to deliver community experience and worked to establish new joint ventures. For example, Barnes &amp; Nobles used existing assets that Amazon.com does not have to create “community centers” and “places of leisure” with comfy sofas, coffee bars, poetry readings, music recitals, art shows, etc. Borders Books Borders engaged in even deeper denial and “wait-and-see” tactics. Finally it maintained its current platform by merging with Waldenbooks to imitate Barnes &amp; Nobles’ community centers strategy and by using Amazon.com as its online platform. (Continued next slide.)

Competitor Analysis (cont.) How should a firm respond to a new competitor, lead, follow, or ignore? Follow: CNN, the All-News Cable Television Channel Reaction by Established Firm: NBC NBC NBC tried to “tap” into the growing market for cable news television and follow CNN’s all-day news channel by creating MSNBC, a joint venture with Microsoft, to broaden its news operations. Facts • MSNBC and MSNBC.com launched in 1996 • As of July 2002, MSNBC’s viewership was 76 million • MSNBC revamped its format towards more talk news shows in order to expand its product line and to retain and expand its market share in response to Fox News Note: No financial data available. (Continued on next slide.)

Competitor Analysis (cont.) How should a firm respond to a new competitor, lead, follow, or ignore? Ignore: CNN, the All-News Cable Television Channel Reaction by Established Firms: CBS and ABC Television Broadcast Networks CBS and ABC decided to ignore CNN’s entrance into the marketplace and maintain its core news programming without launching a 24-hour news only channel as a direct reaction to CNN. CBS Lineup • 6:00 Evening News 60 Minutes I and II feature news story programs 48 Hours Investigates feature news story program ABC Lineup • 6:00 Evening News • 20/20 feature news story program • Primetime feature news story program • Peter Jenning’s special broadcast shows (e.g., Islam-related show)

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Discussion Questions <ul><li>What are the components of the general environment? How does each affect the strategy of a firm? </li></ul><ul><li>What are the five competitive forces in an industry environment? </li></ul><ul><li>What attributes make each of the five competitive forces intense? </li></ul><ul><li>What is a strategic group and why is it an important concept? </li></ul>Click Here Click Here Click Here More discussion questions Click Here Click Here

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Discussion Question 1 <ul><li>What are the components of the general environment? How does each affect the strategy of a firm? </li></ul>

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The External Environment General Environment General Environment General Environment Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Environment Economic Political/Legal Technological Global Demographic Sociocultural

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External Environmental Analysis <ul><li>A continuous process which includes </li></ul><ul><ul><li>Scanning: Identifying early signals of environmental changes and trends </li></ul></ul><ul><ul><li>Monitoring: Detecting meaning through ongoing observations of environmental changes and trends </li></ul></ul><ul><ul><li>Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends </li></ul></ul><ul><ul><li>Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies and their management </li></ul></ul>

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General Environment <ul><li>Sociocultural segment </li></ul><ul><li>Women in the workplace </li></ul><ul><li>Workforce diversity </li></ul><ul><li>Attitudes about quality of worklife </li></ul><ul><li>Concerns about environment </li></ul><ul><li>Shifts in work and career preferences </li></ul><ul><li>Shifts in product and service preferences </li></ul>

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Discussion Question 2 <ul><li>What are the five competitive forces in an industry environment? </li></ul>

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Industry Environment <ul><li>A set of factors that directly influences a company and its competitive actions and responses </li></ul><ul><li>Interaction among these factors determine an industry’s profit potential </li></ul><ul><li>Threat of new entrants </li></ul><ul><li>Power of suppliers </li></ul><ul><li>Power of buyers </li></ul><ul><li>Product substitutes </li></ul><ul><li>Intensity of rivalry </li></ul>

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Five Forces Model of Competition <ul><li>Identify current and potential competitors and determine which firms serve them </li></ul><ul><li>Conduct competitive analysis </li></ul><ul><li>Recognize that suppliers and buyers can become competitors </li></ul><ul><li>Recognize that producers of potential substitutes may become competitors </li></ul>

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Five Forces Model of Competition Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Rivalry Among Competing Firms Five Forces of Competition Click Here Return to Discussion Questions

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Discussion Question 3 <ul><li>What attributes make each of the five competitive forces intense? </li></ul>

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Bargaining Power of Suppliers <ul><li>A supplier group is powerful when: </li></ul><ul><li>it is dominated by a few large companies </li></ul><ul><li>satisfactory substitute products are not available to industry firms </li></ul><ul><li>industry firms are not a significant customer for the supplier group </li></ul><ul><li>suppliers’ goods are critical to buyers’ marketplace success </li></ul><ul><li>effectiveness of suppliers’ products has created high switching costs </li></ul><ul><li>suppliers are a credible threat to integrate forward into the buyers’ industry </li></ul>

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Bargaining Power of Buyers <ul><li>Buyers (customers) are powerful when: </li></ul><ul><li>they purchase a large portion of an industry’s total output </li></ul><ul><li>the sales of the product being purchased account for a significant portion of the seller’s annual revenues </li></ul><ul><li>they could easily switch to another product </li></ul><ul><li>the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry </li></ul>

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Threat of Substitute Products <ul><li>Product substitutes are strong threat when: </li></ul><ul><li>customers face few switching costs </li></ul><ul><li>substitute product’s price is lower </li></ul><ul><li>substitute product’s quality and performance capabilities are equal to or greater than those of the competing product </li></ul>

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High Exit Barriers <ul><li>Common exit barriers include: </li></ul><ul><li>specialized assets (assets with values linked to a particular business or location) </li></ul><ul><li>fixed costs of exit such as labor agreements </li></ul><ul><li>strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets) </li></ul><ul><li>emotional barriers (career concerns, loyalty to employees, etc.) </li></ul><ul><li>government and social restrictions </li></ul>Click Here Return to Discussion Questions

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Discussion Question 4 <ul><li>What is a strategic group and why is it an important concept? </li></ul>

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Strategic Groups <ul><li>Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions </li></ul><ul><li>The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry </li></ul>Click Here Return to Discussion Questions

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Competitor Environment <ul><li>Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities </li></ul><ul><li>what drives the competitor as shown by its future objectives </li></ul><ul><li>what the competitor is doing and can do as revealed by its current strategy </li></ul><ul><li>What the competitor believes about itself and the industry, as shown by its assumptions </li></ul><ul><li>What the the competitor may be able to do, as shown by its capabilities </li></ul>

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Competitor Analysis <ul><li>Current Strategy: </li></ul><ul><li>How are we currently competing? </li></ul><ul><li>Does this strategy support changes in the competitive structure? </li></ul>Current strategy Future objectives

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Competitor Analysis <ul><li>Assumptions: </li></ul><ul><li>Do we assume the future will be volatile? </li></ul><ul><li>Are we operating under a status quo? </li></ul><ul><li>What assumptions do our competitors hold about the industry and themselves? </li></ul>Assumptions Current strategy Future objectives

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Competitor Analysis Response: <ul><li>What will our competitors do in the future? </li></ul><ul><li>Where do we hold an advantage over our competitors? </li></ul><ul><li>How will this change our relationship with our competitors? </li></ul>Response Capabilities Assumptions Current strategy Future objectives